What Is Discretionary Income?

Discretionary income is the money an individual or household has left over for spending or saving after taxes and necessities (traditionally defined as food, housing, and clothing) have been paid for. Discretionary income is calculated after determining disposable income, which is total income minus taxes. Discretionary income is less than disposable income because discretionary income does not include money for necessary living expenses; instead, it is only the money that is saved or spent on luxury (non-essential) goods or services. That can include anything from a new DVD to a car or a vacation.

Many people encounter problems with defining discretionary income because the line between "essential" and "non-essential" goods and services is hard to define. What some may consider necessary, others may view as a luxury, depending on their standard of living. Even categories that are always considered necessary, such as food, can be comprised of non-essential spending: for example, while food is a necessity, there is a big difference between buying necessary groceries and going to expensive restaurants for food every day.

A country's economy can be gauged by the amount of discretionary income that households have: high discretionary income per person in a society is often a sign of high standards of living. During times of economic prosperity, that percentage will be higher than during times of economic downturn. However, some countries, such as the United States, have a more stable percentage of discretionary income. According to a study done in 2007, about 64% of Americans have calculable discretionary income of some kind, meaning. This indicates that over one third of households in the United States make just enough money to spend on necessary living expenses. On the other hand, the household average of those that did have discretionary income was $24,335, while the per capita income was slightly over $9,000.